Earnings Call: Q3 2020

Feb 7, 2020

I'd like to start the presentation on the Q3 of FY March 2020 using the PowerPoint slides. Please refer to Page 1. Here are the results of the 1st 9 months. The strong sales of musical instruments continued, but the impact of exchange rates and the sluggish market for industrial machinery and components resulted in a year on year decline in the revenue and profit. The revenue was 322,600,000,000 yen which was down 2.7% year on year. The core operating profit was 42,400,000,000 yen down 5.5% likewise and the core operating profit ratio was 13.1%, down 0.4 percentage point. As for the full year outlook, we revised it downward taking into account the performance over the 1st 9 months and the uncertainties in the operating environment including the impact of the new coronavirus outbreak in China. We are now expecting the revenue to be 425,000,000,000 yen which is down 2.2% year on year, the core operating profit to be 50,000,000,000 yen down 5.2% and the core operating profit ratio to be 11.8%, down 0.3 percentage point. Next, please turn to Page 3. Here is the summary of the 1st 9 months, which I already mentioned. As you can see, both the revenue and profits declined year on year. The net profit was 32,700,000,000 yen which was a decline of 900,000,000 yen year on year. The exchange rates were as shown here. Moving on to Page 4, here's the GAAP analysis of the core operating profit, which was 42,400,000,000 yen and lower by 2,500,000,000 yen than the previous year. The impact of exchange rates was the greatest at 5,200,000,000 yen We try to offset this impact with a cost reduction as well as the sales increase and model mix, but due to the 2,500,000,000 yen negative growth of IMC Business and others, we resulted in overall decline of the profit. Page 5 shows the performance by business segments. Musical Instruments revenue was 213,300,000,000 yen the core operating profit was 34,800,000,000 yen and the core operating profit ratio was 16.3%. Despite exchange rate impact shown on the right, the business achieved increase in both the revenue and profit and the profit ratio improved 0.5 percentage points. Audio Equipment had a very tough recent quarter. The revenue was 86,200,000,000 yen, the core operating profit was 7,100,000,000 yen and the core operating profit ratio was 8.3 percent suffering the decline in both the revenue and profit. The profit ratio also dropped 0.7 percentage point. IMC Business and others also faced a severe decline in both the revenue and profit. The revenue was 23,100,000,000 yen the core operating profit was 500,000,000 yen and the core operating profit ratio was 2%. Moving on to Page 6. Here is the full year outlook. As I mentioned earlier, we are anticipating decline in both the revenue and profits. The net profit is expected to be 39,500,000,000 yen which will be down 800,000,000 yen or 2.1% year on year. As for the exchange rates, please refer to the bottom half of the slide. The next is Page 7. Likewise, here's the GAAP analysis of the full year core operating profit and the top half shows the factors contributing to the profit decline of 2,700,000,000 yen year on year. The impact of exchange rates will be 6,600,000,000 yen We have been trying to offset the impact with the cost reduction as well as the sales increase and model mix, but we could not offset it completely due to the decline of the iMC business and others. Therefore, the profit is likely to be 50,000,000,000 yen which is 2 point 7,000,000,000 yen lower than the previous year. Compared against the previous projection of 53,000,000,000 yen the current outlook is lower by 3,000,000,000 yen mainly due to the sales that turned out to be lower than the expectation. The sales decrease impact is estimated to be 4,900,000,000 yen We are trying to offset this with SG and A cost decrease, but it will not be enough. So the full year profits now likely to be 3,000,000,000 yen lower than the previous projection. Moving on to Page 8, here is the outlook by business segments. With regards to musical instruments, the revenue will drop 2,000,000,000 yen year on year. This is including the estimated impact of the new coronavirus outbreak in China in the Q4. Unfortunately, we will not be able to absorb all the exchange rate impact. So the musical instruments revenue is expected to decrease a little, but the profit is expected to increase from the previous year. Therefore, the revenue will be 277,500,000,000 yen the core operating profit will be 41,500,000,000 yen and the core operating profit ratio would be 15%, which is an improvement of 0.4 percentage point. As for the audio equipment, even though we are still determined to recover during the Q4, we will not be able to absorb all the exchange rate impact. Therefore, we are projecting decrease in both the revenue and profit year on year. The revenue will be 116,500,000,000 yen the core operating profit will be 8,500,000,000 yen and the core operating profit ratio will be 7.3%, which is a drop of 0.7 percentage point. Regarding IMC Business and others, the Q4 will be continually tough, but the previous year's Q4 was not so good either. In any case, we are anticipating a bit drop in both the revenue and profit and the core operating profit will be 0. Next, please turn to Page 10. From here on, I'd like to give you the details of each business segment. As for the musical instruments, during the 1st 9 months, the sales were strong in all the categories exceeding the previous year's figures. The piano sales were robust, namely with the double digit growth in China and the emerging markets. The sales of digital musical instruments and wind instruments were good except for the sluggish Japan. The guitar sales increased year on year in all the regions and sustained a double digit growth overall. In China, the sales of all the products increased and maintained a double digit growth of 11%. In Europe, North America and Emerging Markets, the sales remained robust. In Japan, the sales declined year on year due to the prolonged impact of the consumption tax hike. As for the full year outlook, all the product categories are expected to grow. The guitars are expected to achieve a double digit growth and the pianos and the digital pianos are also expected to grow steadily. In China, the new coronavirus outbreak is casting uncertainties in the Q4, but basically with the exception of Japan, the sales are expected to be robust in North America, Europe and Emerging Markets. Please look at the chart on the left for the revenue. In the 1st 9 months of a local currency basis, discounting the impact of exchange rates, the musical instruments achieved 4% growth year on year. However, since we may suffer a little decline in the Q4 due to the virus in China, we are forecasting 3% growth for the full year. Moving on to Page 11, here is the revenue breakdown by major product categories. The pianos achieved 7% growth in the 1st 9 months and are expected to achieve 5% growth in the full year. Likewise, the Digital Musical Instruments growth was 6% in the 1st 9 months and will be 4% in the full year. The wind instruments were rather sluggish in Japan, so it was flat year on year in the 1st 9 months and expected to be flat in the full year. The Strings and Percussion instruments achieved 10% growth in the 1st 9 months and are expected to achieve 9% growth in the full year. Actually the guitars are doing very well, but some other instruments were underperforming. So the category growth is expected to be 9%, yet the Guitar alone is achieving double digit growth. Next on Page 12, we are showing the revenue breakdown by each region. We struggled in Japan and the 3rd quarter sales declined 13% year on year. With that impact, the full year is expected to be 5% down. North America has been doing well and achieved 5% growth in the 1st 9 months and 4% growth for the full year. In Europe, 6% growth for the 1st 9 months and 4% for the full year. China has been doing very well during the 1st 9 months and achieved 11% growth, but the Q4 is likely to remain flat year on year. So the full year is expected to be 9%. Other emerging markets achieved 6% growth for the 1st 9 months and forecasted with 5% growth for the full year. Moving on to Page 13, I would like to talk about the audio equipment business. During the 1st 9 months, although the AV product sales declined year on year, the PA equipment sales remained robust. As for the AV products, the sales of receivers were lower than the previous year because the global market has been shrinking further. As for the PA equipment, the sales of new products including the speakers and the installation services that we provide in Japan were performing well. In all the regions, we continue to achieve robust sales exceeding the previous year. The ICT devices enjoyed robust sales of routers and the unified communication products saw a decline of OEM sales in China, which was in line with our expectation. Regarding the full year forecast, PA is expected to grow, but AV is likely to be severe. VAV product sales would decline year on year due to the downturn of receivers. The PA equipment sales would grow year on year due to the contribution of new products and the steady performance of music production and installation services. ICT device sales are expected to decline even though the router sales are recovering because of further drop of the OEM sales of Unified Communication products. Please refer to the figures. The revenue for the 1st 9 months was 1% lower than the previous year and the full year is expected to be flat. Next, please turn to Page 14. Here is the revenue breakdown by major product categories. The sales of struggling AV products in the 1st 9 months was 7% lower than the previous year and it is expected to be 6% lower in the full year. The PA equipment growth is 4% for both the 1st 9 months and the full year. As for ICT devices, please look at the figures in blue, which indicate the sales of Yamaha brand excluding OEM sales. Although we enjoyed a recovery in the Q3, the sales for the 1st 9 months was a negative growth of 12% year on year and it will still be a negative growth of 4% for the full year. The next page shows a breakdown by regions. Japan has been doing very well boosted by the growing installation services. The sales in the 1st 9 months were 8% higher than the previous year and it is expected to be 10% higher in the full year. In North America, especially the AV products has been sluggish, so the 1st 9 months was 7% lower and the full year will be 4% lower than the previous year. In Europe, both the 1st 9 months and the full year are achieving 1% growth year on year. In China, excluding the sales of OEM products, we are expecting a flat growth year on year. The other emerging markets are also struggling with the AV products. Therefore, both the 1st 9 month and the full year will be 1% down year on year. The final segment is the Industrial Machinery and Components Business and Others. In the 1st 9 months, the market conditions for the factory automation equipment did not recover and the sales were much lower than previous year when we enjoyed the special demand. Likewise, for the full year, we have no prospect for the FA market recovery, so the sales would drop sharply year on year. Yet the electronic devices are likely to grow year on year with the recovery of amusement equipment devices. The revenue for the 1st 9 months was 17% lower than the previous year and the full year revenue is expected to be 10% lower. The full year core operating profit is expected to be 0, as I mentioned earlier. As for the other financial figures, please refer to the balance sheet on Page 18. The total assets as of the end of December 2019 was 527,700,000,000 yen and the total equity equivalent to the net assets was 366,800,000,000 yen. Most of the changes from the balance at the end of March 2019 can be attributed to seasonality. But one thing I should explain is the increase of 7,800,000,000 yen in total equity. We booked the net profit of 32,700,000,000 yen and paid out the EBITDA dividend and repurchased our shares, so the net balance was an increase of 7,800,000,000 yen At the end of March 2020, the total assets are expected to be 521,100,000,000 yen and the total equity will be 365,100,000,000 yen There would be no particular changes to mention. Regarding the capital expenditure, the full year forecast is 20,000,000,000 yen. It will be higher than the previous year, but it will be slightly lower than the previous projection of 22,000,000,000 yen. It is because the production capacity enhancement in China has been delaying and some of them will be postponed to the next fiscal year, so we reduced 2,000,000,000 yen. The R and D expenses are forecasted to be 25,000,000,000 yen, which is also slightly lower than the previous projection. It was a quick overview, but that's all from me. Thank you very much.